Pasternacki v Correy [1999] NSWSC 119

New South Wales Supreme Court CITATION : Pasternacki v Correy [1999] NSWSC 119 CURRENT JURISDICTION : Common Law Division FILE NUMBER(S) : 12342 of 1994 HEARING DATE(S) : 11/02/99 JUDGMENT DATE : 26 February 1999

Andrew Pasternacki and Krystna Solka-Pasternacki (plaintiffs/1st cross-defendants) Daphne Correy (1st defendant/cross-claimant) PARTIES : Henry Stephen Correy (2nd defendant/2nd cross-defendant) Jordan Antonopoulos (3rd defendant)

JUDGMENT OF : Hidden J

M Skinner (plaintiffs) COUNSEL : D M Lowenstein (1st defendant) L McCallum (3rd defendant) Taylor Kelso (plaintiffs) SOLICITORS : Russell McLelland & Brown (1st defendant) Mallesons Stephen Jaques (3rd defendant) CATCHWORDS : Judgment upon relief - following finding of unjust contract (Pasternacki v Correy: Hidden J, 7/08/98, NSWSC); Contracts Review Act - whether to set aside mortgage ACTS CITED : Contracts Review Act 1980 DECISION : Mortgage set aside. Judgment for 1st & 3rd defendants; judgment for plaintiffs against 2nd defendant

- 10 - THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

HIDDEN J

Friday 26 February 1999

12342 of 1994 PASTERNACKI & Anor v CORREY & Ors

JUDGMENT UPON RELIEF 1 On 7 August 1998 I gave judgment in this matter, in which I determined that the contract between the plaintiffs and the first defendant, Mrs Correy was unjust and that, in all the circumstances, she was entitled to relief under the Contracts Review Act 1980. I invited submissions from the parties as to the form which that relief should take. I have since been supplied with helpful written submissions, and on 11 February 1999 I heard oral argument on the matter. Findings of fact 2 Counsel for the plaintiffs relied upon a number of findings in my judgment in support of his submissions. I found that Mrs Correy was aware of the nature of a mortgage, that she was borrowing the amount involved on behalf of her son and that she understood that she was making her home available as security for that loan. I did not find that the behaviour of the plaintiffs (through Mr Smith or Mr Pasternacki himself) was unconscionable according to common law principles. I did find that the circumstances were such that they knew or should have known that Mrs Correy was under some emotional pressure from her son. However, I did not find that they understood Henry Correy's financial position and business prospects to be precarious. Rather, I found that they were ignorant of his situation and, in the circumstances, were put on enquiry. 3 In addition, counsel for the plaintiffs relied upon some evidence, about which I made no finding, suggesting that Mrs Correy herself received part of the sum advanced. In my judgment I referred to a letter, exhibit D1, which included a direction for payment of that sum. That document was prepared by Mr Smith before he met Mrs Correy on 18 May 1994. After deduction of costs, expenses and an additional amount for interest, the balance of $113,465.95 was to be paid "to Henry Steven Correy as directed". Mr Smith gave evidence that he drafted the document in that way as he understood that the money was "to be disbursed as per Henry's business arrangements…". 4 In the afternoon of 18 May Mr Smith, at Henry Correy's request, prepared a handwritten direction that the $113,465.95 be disbursed by two cheques as follows: $104,280.11 to Young Fast Ltd and $9,185.84 to D. Correy (Mrs Correy). That document, exhibit D2, was signed by Mrs Correy and Henry. How those figures were arrived at was not explained in the evidence. Nor was there any evidence about the company, Young Fast Ltd but, obviously, it was an enterprise with which Henry was associated. Mr Smith then prepared a letter, exhibit D3, to the manager of the bank where the trust funds were held, requesting that several cheques be drawn. One of those was to Young Fast Ltd for $103,621 and another to D. Correy for $9,844.95. Again, the evidence does not explain why these figures are different from those appearing in the direction, exhibit D2. 5 The significance of this, of course, is that it suggests that Mrs Correy herself received about $9,000. However, she denied having received any money at all out of the transaction. She acknowledged that she had signed the hand written document, exhibit D2, but said that she had no recollection of it. She did say that a cheque for about $9,000 was prepared in her name, because her son had no personal identification with him and needed some cash immediately in case he had to travel overseas. She added that, when they attended the bank, Henry received an amount of that order in cash. Mr Smith said that Henry was anxious to receive the entire sum in cash that afternoon, and he had to explain that he could only receive cheques on settlement. Henry asked whether he could have the cheques cashed as he had to get the money to America that night, and Mr Smith told him that he would have to phone the bank and see what they could do for him. 6 I accept Mrs Correy's evidence that she received no money at all. Her evidence to that effect was not tested in cross-examination. Her attention was directed to exhibit D2 and her signature upon it, but she was asked no question about her need for that amount of money or what she had planned to do with it. The effect of the evidence as a whole is that the transaction was for the benefit of Henry Correy, and there is nothing else to suggest that Mrs Correy herself had any financial interest in it. We may never know why Henry wanted a cheque to be drawn in his mother's name. The explanation proffered by Mrs Correy may be correct. However that may be, I am satisfied that it was not his intention that Mrs Correy should receive the proceeds of that cheque and, in fact, she did not. Plaintiffs' claims 7 Before turning to the Contracts Review Act, I should deal with a submission by counsel for the plaintiffs that, whether or not Mrs Correy was entitled to relief under that Act, they were entitled to recover from her the amount advanced plus interest. The statement of claim contains a common money count seeking payment of that sum, as well as a claim for possession of the property. Even if the mortgage were liable to be set aside, the fact remains that a substantial sum of money was lent. It was argued that that sum and some amount of interest, even if assessed at a rate lower than that specified in the mortgage, was recoverable in accordance with the principles considered by the High Court in Pavey & Matthews Pty Ltd v Paul (1986) 162 CLR 221. Some analogy was sought to be drawn with the facts of that case, in which it was held that a builder was entitled to bring an action upon a quantum meruit for the value of work done and material supplied under an oral building contract, despite the fact that that contract was unenforceable because of certain provisions of the Builders Licencing Act 1971 (NSW). It was acknowledged that, if judgment were obtained against Mrs Correy on this basis, it could be enforced only by the sale of the house. 8 Counsel for Mrs Correy submitted, with some force, that the present case is distinguishable in a number of respects from that with which the High Court was dealing. It is sufficient to say that the plaintiffs' submission cannot be accepted, given the intervention of the Contracts Review Act. Section 7(1) of that Act empowers the court to grant relief "for the purpose of avoiding as far as practicable an unjust consequence or result…". If Mrs Correy is entitled to such relief, it would effectively be defeated by the course for which the plaintiffs contend. There is some parallel with the judgment of Dunford J in National Australia Bank Ltd v Hall (1993) NSW ConvR 55-684, a case involving a third-party mortgage given by an elderly woman over her home to secure her liability under guarantees for the benefit of her daughter and son-in-law. In the course of his reasons for determining the appropriate form of relief under the Contracts Review Act, his Honour said (at 59,913): …if I were to set aside the mortgage but make no order in respect of the guarantees the effect would be that the property would be sold by the Sheriff instead of by the Bank… 9 The same fate must befall the plaintiffs' alternative submission that, if I were to set aside the mortgage under the Act, I could do so only upon condition that Mrs Correy repay the amount advanced with interest. For this purpose, counsel for the plaintiffs relied upon the equitable principles considered by the High Court in Maguire v Markaronis (1977) 71 ALJR 781. To approach the matter in that way would also be to frustrate the flexibility and beneficial purpose of the Act. Contracts Review Act 1980 10 It is clear that a finding that a contract is unjust does not necessarily mean that relief under the Act should be granted. In Younan & Anor v Beneficial Finance Corporation Ltd (C of A unreported, 21 November 1994) Mahoney J observed (at p11): A decision to exercise the power given by the Act involves two things: a decision that the contract or a portion of it was "unjust"; and a decision that, this being so, it is "just" to do "one or more of the" things referred to in s7(1). 11 On the question whether it would be "just" to grant any of the forms of relief in s7(1), his Honour added (at p12): Terms referring to justice look primarily to the balance between the competing parties and "justice" in this sense, involves the Justinian concept of giving to every person his due… In the present Act, the terms of it indicate ( subject to what I shall say) that the court is to form a view as to what in the circumstances the interests of each party are and the extent to which the concept of injustice requires that one be preferred to the other. 12 In Younan the court declined to grant relief even though the contract was found to be unjust: see also Nguyen v Taylor (1992) 27 NSWLR 48. In support of the submission that no relief should be granted in this case, counsel for the plaintiff relied upon some of the findings of fact referred to earlier. This was not the more familiar case of a third party mortgage, as Mrs Correy herself was the borrower. The plaintiffs, as trustees for the beneficiaries under a will, have lent a substantial sum of money which has not been recovered. I did not find unconscionable conduct on their part. Unlike cases such as Beneficial Finance Corporation Limited v Karavas (1991) 23 NSWLR 256 and Teachers Health Investments Pty Ltd v Wynne (1996) NSW Conv R 55-785, I did not find that they were aware that the transaction was improvident from Mrs Correy's point of view. 13 On the other hand, as I have said, I am satisfied that the loan was in fact for the benefit of Henry Correy and that Mrs Correy received none of it. The plaintiffs were aware that she had no prospect of repaying the loan from her own resources and were on notice that she was under some emotional pressure. The circumstances of the transaction, including the haste with which it was conducted, should have aroused their suspicion about its providence. Not only should they have made proper inquiry themselves about Henry Correy's business and his means, they should also have required Mrs Correy to seek advice about the financial soundness of the arrangement. 14 A substantial amount of money held on trust has been lent, and the only prospect of recovery is the sale of the home upon which the loan was secured. In that event, Mrs Correy would lose her home and her only significant asset. As her counsel observed, for her that would be "the end of the road". It is most unlikely that her son would ever come to her aid and, given her status as borrower and his as guarantor, she would not appear to be entitled to any redress from him in law. On the other hand, the beneficiaries under the will might have some recourse against the trustees and they, in turn, against the solicitors. (In that context, counsel for Mrs Correy raised the question of the solicitors' professional indemnity insurance, but I do not think that that is a matter to which I could properly have regard). After a consideration of the conflicting interests of the parties, I remain satisfied that Mrs Correy is entitled to relief under the Act. The more difficult question is the form which that relief should take. 15 The plaintiffs contend that I should do no more than defer enforcement of the mortgage during Mrs Correy's lifetime, so that she might continue to occupy the home. This is a course which was taken in a number of cases: Melverton v Commonwealth Development Bank of Australia (1989) NSW Conv R 55-484, National Australia Bank Ltd v Hall (supra), Reisch v Commonwealth Bank of Australia (Simos J, unreported, 13 March 1998). That course, it was submitted, would be an adequate remedy and would have the added benefit of ensuring that Henry Correy himself could not inherit the property. 16 For Mrs Correy, it was argued that the mortgage should be set aside. Simply to allow her to occupy the home during her lifetime would deprive her of the ability to realise her asset, which she might need to do in later life. Her counsel pointed out that there is no evidence of her testamentary intentions and, in any event, the order proposed by the plaintiffs would disinherit her other son, Carlo, who is innocent of any wrongdoing. 17 I have not found this question easy to resolve. For the reasons I have given, the behaviour of Mr Smith in this transaction could fairly be described as reckless, but the power to grant relief under the Act must not be used in a penal or disciplinary manner: Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482 per Handley JA at 489. Counsel advanced the two options which I have outlined, and no intermediate course was suggested in argument. I was initially attracted to the plaintiffs' proposal but, upon reflection, I do not believe that that is the appropriate course. Unlike the lenders in cases such as Melverton, the plaintiffs may have recourse against their solicitors for the loss they have incurred. (In so saying, I do not overlook the fact that one of the plaintiffs is also a partner in that firm.) The plaintiffs are entitled to judgment against Henry Correy on his guarantee. On the face of it, that is little comfort to them but, if he were to inherit an interest in the property, an opportunity to enforce that judgment might present itself. On the other hand, the plaintiffs' proposal would effectively deprive Mrs Correy of her only asset and, in reality, she would have no redress against anyone. 18 I have come to the conclusion that Mrs Correy is entitled to the relief which she seeks, whereby her home is freed of the encumbrance upon it and she is relieved of her personal liability under the mortgage. The mortgage should be set aside and such ancillary orders should be made as are necessary. Henry Correy 19 The plaintiffs are entitled to judgment against Henry Correy for the amount advanced plus interest at 20% from the date of the advance. Orders 20 I request the parties to bring in short minutes to give effect to my reasons. It was agreed that I should not make any order about costs until I had determined the question of relief and the parties should have the opportunity to be heard on that matter.